Paycheck Protection Program – Part 2: New Money and New Rules

January 19, 2021

The Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act (the “Act”) was signed into law on December 27, 2020, as part of the Consolidated Appropriations Act, 2021. The Act’s goal is to extend the term of certain economic relief programs created under the Coronavirus Aid, Relief, and Economic Security Act (Pub. L. 116–136) (the “CARES Act”), including, extending the Paycheck Protection Program (“PPP”) program. The key updates to the PPP program implemented by the Act are outlined below. 

Additional PPP Funds Available.

  • The Act appropriates an additional $284.45 billion to the PPP program (“Additional Funding”). 
  • The new application deadline to receive the Additional Funding in the form of a PPP loan is March 31, 2021, or upon exhaustion of the Additional Funding.
  • To promote equal access to the Additional Funding, community financial institutions began making additional PPP loans on January 11, 2021 with the Small Business Administration (“SBA”) encouraging these lenders to focus on providing capital to Minority, Underserved, Veteran and Women-Owned qualifying businesses. On January 13, 2021, additional PPP loans became available to all eligible borrowers if lent through one of these community financial institutions, including community development financial institutions, minority depository institutions, certified development companies and microloan intermediaries. The Additional Funding is expected to open to all participating lenders on January 19, 2021. 

New Borrowers Can Apply for Initial PPP Loans.

  • The Act permits any eligible borrower who did not receive a PPP loan prior to August 8, 2020 (each, an “Initial Borrower”) the opportunity to receive an initial PPP loan (a “First Draw Loan”).
  • Initial Borrowers are required to satisfy the eligibility criteria set forth in the original CARES Act, not the more restrictive eligibility criteria of the Act, described below.

Borrowers Who Have Previously Received PPP Loans May Apply for a Second Round of Funding.

  • If a borrower who did receive a PPP loan in prior to August 8, 2020 (a “Second Draw Borrower”) meets the stricter eligibility requirements of the Act, then it may apply for a second PPP loan (a “Second Draw Loan”).
  • Generally, subject to certain exceptions described below, Second Draw Borrowers may obtain a Second Draw Loan up to the lesser of: (i) $2,000,000 and (ii) at the Second Draw Borrower’s election, the average total monthly payment for payroll costs incurred or paid during: (a) the 1-year period before the date of the Second Draw Loan or (b) calendar year 2019, multiplied by 2.5. 
    • Seasonal employers (business that (x) do not operate for more than 7 months in any calendar year or (y) during the previous calendar year, had gross receipts for any 6 months of that year that were not more than 33.33% of the gross receipts of the employer for the other 6 months of that year) are permitted to use the average total monthly payments for payroll for any 12-week period between February 15, 2019 and February 15, 2020.
    • Accommodations and food service businesses (business whose NAICS code begins with 72) are eligible for up to 3.5x the average total monthly payment for payroll costs.
  • A Second Draw Borrower may only receive one (1) Second Draw Loan.

New Eligibility Requirements. 

  • A Second Draw Borrower must be a business or nonprofit organization that: (i) employs not more than 300 employees (subject to the affiliation rules promulgated for the PPP program); (ii) can demonstrate not less than a 25.0% reduction in gross receipts during any calendar quarter in 2020 compared to the same calendar quarter in 2019 and (iii) at the time of disbursement of the Second Draw Loan, has expended (or will have used) the full amount of their initial PPP loan.

Prohibited Borrowers. 

  • The Act excludes certain initial PPP borrowers from receiving Second Draw Loans, including: (i) businesses ineligible for a loan under existing regulations promulgated under the SBA Section 7(a) Loan Program (with an exceptions for non-profit businesses and certain religious businesses); (ii) businesses not in operation on February 15, 2020; (iii) publicly traded companies; (iv) businesses primarily engaged in lobbying or other political activities (including political campaigns and think tanks) with exceptions for certain 501(c)(6) organizations and certain destination marketing organizations; (v) professional sports leagues; (vi) (A) businesses owned by an entity created in, organized under or with significant operations in China that owns or holds, directly or indirectly, not less than 20.0% of the economic interest of the business or (B) any business that retains, as a member of its board of directors, a person who is a resident of China; (vii) businesses in which the President, the Vice President, the head of an executive branch department, or a member of Congress, as well as each of their respective spouses, directly or indirectly, owns, controls or holds 20 percent or more, by vote or value, of the business; (viii) recipients of a “shuttered venue operator grant” under Section 24 of the Act (which includes eligible theaters, museums, zoos and entertainment venues); (ix) any person required to submit a registration statement under the Foreign Agents Registration Act (i.e. a person who is an agent of a foreign principal); and (x) businesses with more than one physical location, with exceptions for certain accommodation or food service businesses (NAICS “72” business) and certain news organizations.

Changes to the Covered Period, Permitted Uses of Additional and Original PPP Loans.

  • The “Covered Period,” defined under the CARES Act as the finite period of time in which PPP loan proceeds must be expended on authorized uses in order for such funds to qualify for loan forgiveness, has been amended for PPP loans granted under the Act.
  • Under the Act, PPP funds may be spent beginning on the date of the disbursement of the Second Draw Loan and ending on a date selected by the Second Draw Borrower. The Borrower may pick a date that occurs: (i) during the period starting 8 weeks after the disbursement date and (ii) ending 24 weeks after such date of disbursement. This revision allows Second Draw Borrowers to adjust the covered periods to end before a reduction in the borrower’s workforce is required, thereby avoiding a potential loss of loan forgiveness due to a reduction in full time (or full time equivalent) staff. Please note that this change was not made retroactively and therefore does not apply to any initial PPP loans obtained under the CARES Act prior to August 8, 2020. As was the case with the initial round of PPP funding under the CARES Act, at least 60.0% of the amount of the loan to be forgiven must be compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation (“Eligible Payroll Costs”). However, in the Act, this definition has been updated to expressly include group life, disability, vision and dental insurance costs. 
  • Again, as with the CARES Act PPP loans, sixty percent of the loan proceeds must be used to cover payroll expenses, the remaining forty percent may be spent on other forgivable expenses in order to receive forgiveness of the loan. Under the CARES Act, the forgivable expenses were limited to (i) covered mortgage obligations, (ii) covered rent obligations and (iii) covered utility payments (“CARES Act Forgivable Expenses”). However, under the Act, borrowers are now permitted to use forty percent of the PPP loan proceeds (and receive loan forgiveness) not only for the CARES Act Forgivable Expenses but also for each of the following additional categories: (i) covered operations expenditures (including business software or cloud computing services that facilitate business operations; product or service delivery; payroll processing, human resources, sales and billing functions or accounting for supplies, inventory, records and expense); (ii) costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 (to the extent such damage is not otherwise covered by insurance or other compensation); (iii) covered supplier costs (including expenditures for essential supplies from vendors if the contract or purchase order was already in place at the time of the PPP loan); and (iv) covered work protection expenditures (including expenditures (including expenditures that facilitate compliance with requirements or guidance from the Department of Health and Human Services, the Centers for Disease Control or the Occupational Safety and Health Administration) (clauses (i) – (iv), collectively, the “New Forgivable Expenses”).

Changes to Existing PPP Loans Not Yet Forgiven.

  • The Act provides that borrowers whose initial PPP loans have not been forgiven may reapply to borrow additional funds under the initial PPP loan if they: (i) returned a portion of their initial PPP loan; (ii) borrowed less than the maximum loan amount they qualified for originally or (iii) are eligible for an increased PPP loan as a result of any interim final rule that results in an increase to the borrower’s maximum PPP loan amount. 
  • If additional funds are received on an initial PPP loan, such funds may be used toward the New Forgivable Expenses and will be forgiven.
  • Under the Act, advances on Economic Injury Disaster Loans (“EIDL”) no long reduce PPP loan forgiveness. If a borrower received both a PPP loan and the EIDL “grant” (whether or not they received an EIDL loan), the grant amount (but not any EIDL loan amount) will be fully forgiven and will not be deducted from the PPP loan received. 
  • The forgivable expenses as defined under the CARES Act are still forgivable under the new PPP loans authorized by the Act.

New Tax and Bankruptcy Rules. 

  • The Act establishes tax deductibility of expenses paid with PPP loan proceeds. This will allow business owners who received PPP loan(s), which are tax-free, to claim deductions for expenses that would normally be considered tax deductible even if such expense was paid out of the PPP loan proceeds. This rule reverses previous guidance and applies retroactively to all PPP borrowers.
  • In addition, the Act amends Sections 364, 503(b), 1191, 1225 and 1325 of the Bankruptcy Code to enable a debtor-in-possession (or trustee that is authorized to operate the business of a debtor) to apply for and borrow a PPP loan, notwithstanding any contrary contractual restriction, prior prohibition under Section 363 of the Bankruptcy Code regarding use of cash collateral or any other law prohibiting the debtor from incurring additional debt. 
    • The Act provides that any PPP loan is to be treated as debt in bankruptcy to the extent that such loan is not forgiven. 
    • The PPP loan will be entitled to priority as an administrative expense, and a plan of reorganization will be confirmable if it proposes that the debtor make payments on the PPP loan when due. 

The authors would like to thank Morgan Nelson for her contributions to this OnPoint.

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